A central New Jersey community thrift seeking cheap capital has become the first in the state in several years to sell its debt on the public market.

Burlington-based FMS Financial Corp. raised almost $10 million in a July 21 debt sale. Some 491 small investors purchased $1,000 debt certificates, investing between $10,000 to $50,000 each.

The debt certificates, which can be redeemed by the $480 million-asset corporation in three years and mature in 10 years, haye a yield of 10%, paying interest twice a year after Feb. 1, 1995.

The public sale of debt is unusual for so small an institution, especially a thrift, according to one analyst. With the highly publicized troubles in the industry in the last decade, small investors have eschewed the securities, preceiving them as a credit risk. Most debt placements have been done privately, with institutional investors.

That's not to say there aren't any strings attached. FMS' debt is unrated, and the company is restricted from paying dividends on, or buying back, any common stock. FMS is also barred from a merger unless the buyer accepts the thrift's obligations.

FMS opted to borrow money rather than sell stock because executives were dissatisfied with the price of the stock, which is selling around its book value

of $22. Thrift officials felt FMS had more value that wasn't being reflected.

"We have more faith in this business so far than the market has puts put the stock price," said chief executive Craig W. Yates, noting that thrifts have been selling recently at much higher than book value.

Also, using debt for capital needs avoids diluting stockholder equity, said Benjamin Plotkin, an analyst with Ryan, Beck & Co., West Orange, which sold the securities for FMS.

Offering public debt makes fiscal sense for financial institutions, too, Mr. Plotkin said, because the yield they pay On the debt is considered interest, which is tax deductible. And in many cases, "an institution can use that capital and grow and earn a better return on equity than what they're paying on debt."

But it has usually just been the larger regional banks that have been able to access the public debt market, Mr. Plotkin said. And when smaller banks do become involved, it's usually private, he said.

"It's much more unusual to have a straight debt done publicly" for small banks, he said.

But with the past problems of savings banks mostly behind them and regulators overseeing them, "savings banks have become a far more secure investment than a lot of manufacturing companies' bonds," Mr. Yates said.

"They [investors] felt pretty secure, because it was a solid community bank, that they didn't have much risk," he said.

FMS sought the-extra-capital to bid in Resolution Trust Corp. sales of failed thrift assets, particularly three branches of the former Security Savings Bank in Southern New Jersey.

But the branches were sold in June to Meridian Bancorp of Reading, Pa., which bid $42 million for almost 30 branches compared 16 FMS $7 million for the three.

FMS pIans to seek other chances to buy or start new branches.

The offering comes just six months after. FMS was released from an Office of Thrift Supervision cease-and-desist order imposed in June 1991 to force the thrift to change its loan procedures. FMS reported a loss in 1990 of $3.7 million due to bad loans.

The offering at also follows FMS' settlement ---for a combined $340,000 - of two lawsuits resulting from past management problems, bad investments, and conflicts of interest involving the thrift's land development subsidiary, Land Financial Services.

FMS is the holding company for Farmers' and Mechanics' Savings. Bank, which has 12 branches in Burlington County.

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